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Thursday, September 29, 2011

A Pyrrhic Victory for Merkel?

The headlines tomorrow will say that the German Bundestag agreed to pass the expansion of the EFSF, and that Chancellor Merkel managed to get enough coalition votes to preserve her ‘Chancellor’s majority’; 315 in favour, 13 against and 2 abstentions. This meant she did not suffer the humiliation of having to rely on the votes of the opposition, which could have gone as far as bringing down her Government and triggering early elections.

So, indeed, a crisis has been averted and Merkel again showed signs of being a shrewd and canny operator (it was a while ago since we last saw such signs). She also displayed some pretty impressive expectation management skills, getting a bigger majority than many had anticipated.

However, the German public isn't exactly impressed. An opinion poll commissioned by Bild immediately after the vote hardly inspires confidence; only 6% of Germans believed that MPs understand exactly what it it is that they are deciding, while 47.5% did not believe they had an adequate overview of the situation.

There are still many questions to be answered and the road ahead remains uncertain. More than anything this demonstrates how the eurozone crisis has constantly frustrated politicians’ attempts to bring it under control by mutating rapidly while they are still dealing with its previous stages. Here we had the slightly absurd situation where the Bundestag was considering measures agreed by European leaders back in July to boost the EFSF’s bailout guarantees to €440bn, (Germany’s share will increase from €123bn to €211bn), while earlier this week it was reported that Eurozone and global leaders were in negotiations to increase the size of the EFSF to €2 trillion, possibly using a leverage scheme through the ECB.

As expected, the Budestag witnessed a feisty debate, with plenty of accusations flying around as to who was to blame. This however disguised the fact that of the five parties, only the left-wing ‘die Linke’ was wholly opposed to the EFSF expansion (on the grounds that it was a bailout for banks and not citizens), while the coalition CDU/CSU and FDP parties argued for it begrudgingly, and the opposition SDP and Green Party argued the measures did not go far enough. The unifying factor was a feeling that Germany had done very well out of membership of both the EU and the Eurozone, and that it had a responsibility to ensure stability and support struggling members.

However, how far this solidarity should go, and what institutional form it should take provoked the most disagreement. Let's remember that today's vote was mainly about exanding the scope of the EFSF - to allow it to buy govenrment bonds, precautionary lending and capitilse banks - it did also increase the lending capacity to €440bn (as it was originally meant to be) but did not push the size of the fund any further - as many have recently been calling for.

What became clear during the debate is that Merkel used up a lot of political capital persuading coalition MPs, who railed against fiscal irresponsibility, and transfers of debt between member states to vote for the expansion. It was also evident that for many this was a line in the sand; they would accept the expansion of the bailout fund, but no additional measures. The FDP’s Rainer Brüderle, former Minister for the Economy insisted that:

“The rescue mechanism must not be allowed to become an investment bank… Germany must fulfil commitments under Lisbon treaty but in future structural changes must be enacted to prevent unfair transfers”

Brüderle also raised the spectre of hyperinflation, something the FDP in particular are very concerned about. Germany’s finance minister Wolfgang Schäuble said that “the whole of Europe depends on Germany’s economic stability”, and about the tough conditions that Greece must meet in order to receive the next tranche of bailout funds. However not all coalition MPs were satisfied, with CDU dissenter Klaus-Peter Willsch arguing that “you can't fight debt with debt”, although the muted applause was an early indication not enough of his colleagues were prepared to back him in the vote.

The arguments adopted by the opposition were fascinating, in that they argued that the crisis had been exacerbated by the Government’s unwillingness to work with other European states. The SPD’s Peer Steinbrück argued Germans had lost faith in the Government because of its lack of leadership, while the Greens went even further, with senior Green politician Jürgen Trittin arguing that:

“Germany has a responsibility to Europe which it cannot renege on… the Government’s insular and eurosceptic tendencies have prolonged the crisis… Barroso was right [in his State of the Union speech yesterday] that the European Commission is Europe's economic Government, we need strong democratic EU institutions in this globalised era.”

His party colleague Priska Hinz argued that:

“We need more budgetary co-ordination, a Financial Transaction Tax, Eurobonds and if treaty changes are necessary to accomplish this then we'll campaign for them.”

So while the vote was easily passed by a 523 votes in favour and 85 against (with 3 abstentions), the preceding debate clearly demonstrated serious differences between the coalition parties, and to a lesser degree within them. Here are some key issues to look out for in the German debate:

The issue of Eurobonds, enthusiastically backed by the opposition is an absolute no-go area for the coalition parties - but backed by the Greens and SPD that currently lead in the polls (illustrating how public euro discontent still is to filter through to party politics).

Merkel needs to decide whether to revise the complex and flawed second Greek bailout, meaning there are still key battles that have yet to be fought within parties, between them, with other European partners and some of Europe’s largest financial institutions.

The future role of the ECB will be crucial, specifically whether Germany can accept an expanded mandate for the bank, particularly through a larger bond buying programme, and whether the EFSF’s firepower will be increased by leveraging it through the ECB.